Last year today, El Salvador’s President Nayib Bukele announced that the country would roll out a bill to make the cryptocurrency Bitcoin legal tender in the South American nation.
Bukele stuck to his word, making El Salvador the first nation to adopt bitcoin as a legal tender on September 7, 2021.
The President announced his intentions to make Bitcoin the legal currency of El Salvador at the Bitcoin 2021 Miami conference. It is interesting to note that Bukele's move is considered the first experiment by a country in using a volatile currency as legal tender. Notably, this scheme attracted many critics, including the International Monetary Fund and top economists.
Many experts claimed that this step would actually lead to increased money laundering and illegal activities.
Several financial experts were doubtful of the results of this decision highlighting that Bitcoin is highly volatile. They also argued that the cryptocurrency does not have any physical backing, making this decision even more injudicious and underdeveloped.
The volatility of crypto markets, especially Bitcoin can also be understood via numbers. Bitcoin was trading close to $69,000 in November 2021 and crashed to $30,000 levels in June 2022, a little over six months. The global market cap of cryptocurrencies also shrunk from an all-time high of $ 3 trillion to $ 1.25 trillion in the past 6 months.
Why did El Salvador plan to adopt Bitcoin as legal tender?
President Bukele, while announcing his plans to legalise Bitcoin as legal tender claimed that this was to financially uplift the rather underdeveloped country. Bukele said that the move would make financial services more accessible in the Latin American country where over 70 per cent of the local population does not have a bank account.
Bukele also said that this move would also improve remittances from abroad, which aid the nation’s economy. It is interesting to note that Bitcoin transactions are considered cheaper for sending large sums of money at a considerably lower fee.
The President claimed that after the underdeveloped adoption of Bitcoin as legal tender, the country would save $400 million in annual remittance commissions.
How did the government aide Bitcoin adoption in El Salvador?
After the law was rolled out in September, the El Salvadorean government launched the Chivo Wallet app. The nation also conducted far and wide awareness camps to teach people how to use the digital wallet as well as familiarise them with Bitcoin.
The Chivo Wallet app allows users to convert Bitcoin to dollars and vice versa for zero charges. Users are also allowed to send and receive either currency via the wallet.
What has been the outcome of this experiment?
Nayib Bukele has claimed several times that the decision has helped in the economic upliftment of the country with increasing access to financial services.
Moreover, the El Salvadorean Minister of Tourism claimed that Bitcoin adoption has pushed tourism in the country as well. She claimed that it has resulted in a 30 per cent increase in tourist footfall with 1.4 million people visiting the country.
El Salvador also hosted several central bankers and top economists in a Bitcoin meet-up recently and discussed plans for the Bitcoin city.
Despite the claims of the government and ministers, the country is still experiencing low rates of GDP growth. GDP growth rates have not risen over low single digits in the last two decades, with GDP growth in 2021 being 4.2 per cent.
The GDP growth in 2018 and 2019 was 2.4 per cent each. Compared to that, the levels of 2021 do seem to be an improvement but it is worth noting that while making such assessments the year 2020 needs to be discounted because of the covid and pandemic which resulted in an economic slowdown after which all economies showed exceptional growth.
It's safe to say that more time and data would be needed to judge the Bitcoin experiment in El Salvador.
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